7 Fascinating Facts About How US Presidents Affect The Stock Markets

Bill Clinton

Photo: Wikimedia Commons

It’s still an election year and the presidential campaign rages on.Everyone is making a lot of noise about how election years tend to be good ones for stocks.

However, historically, every year of the 4-year presidential cycle tends to be a good one for stocks.

Are these correlations totally spurious?

“No,” argue many experts.  Goldman Sachs’ Jose Ursua, Professor Robert Prechter, and S&P Capital IQ’s Sam Stovall are among the voices that note that election cycles have major economic and behavioural implications for the stock markets.

We cobbled together everything we know about the connection between stocks and presidents. Maybe, you’ll find it to be a useful guide to the stock market and perhaps even the election.

The 3rd year of a President's term is usually the best for stocks

On average, the third year of a presidency is by far the best year for stocks. That's not to say it's always the best year. 'However, as can be remembered vividly, this approach did not work at all in 2008,' warns Citi's Tobias Levkovich.

Source: Citigroup

Volatility spikes in the 2nd year, then levels off

From Goldman Sachs' Jose Ursua: 'Volatility often sees a first post-election blip (as markets digest changes) and then a gradual increase towards the second year of the cycle.'

Source: Goldman Sachs

Equity returns, worldwide, are better explained when considering US election-related variables

U.S. election cycles explain more than just U.S. equity returns. From Goldman Sachs' Jose Ursua: 'In particular, the election cycle in the US helps to explain a sizable fraction of non-US equity returns, both in other developed markets and in emerging markets.'

Source: Goldman Sachs

Since 1900, only 5 presidents have seen stocks rise more than 50% during their term

The exclusive club includes Calvin Coolidge, FDR, Dwight Eisenhower, Bill Clinton, and Barack Obama.

Source: Bespoke Investment Group

When stocks rise significantly during a presidential term, the incumbent usually wins re-election in a landslide

You can figure out who will be president based on the 3-month stock market performance preceding an election

From S&P Capital IQ's Sam Stovall: 'An S&P 500 price rise from July 31 through October 31 traditionally has predicted the reelection of the incumbent person or party, while a price decline during this period has pointed to a replacement. Since 1948, this election-prognostication technique did an excellent job, in our view, recording an 88% accuracy rate in predicting the re-election of the party in power (it failed in 1968). What's more, it recorded an 86% accuracy rate of identifying when the party in power would be replaced (it failed in 1956).'

Source: Stovall's Sector Watch

Lately, President Obama's approval rating has been tightly correlated with stocks

The chart seems to speak for itself. Read more here.

The 2012 election is just one risk investors must consider this year

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